Question

Nautical Creations is one of the largest producers of miniature ships in a bottle. An especially complex part of one of the ships needs special production equipment that is not useful for other products. The company purchased this equipment early in 2016 for $200,000. It is now early in 2020, and the manager of the Model Ships Division, Jeri Finley, is thinking about purchasing new equipment to make this part. The current equipment will last for six more years with zero disposal value at that time. It can be sold immediately for $40,000. The following are last year's total manufacturing costs, when production was 8,200 ships: Direct materials Direct labor Variable overhead Fixed overhead Total $31,980 29,110 15,170 36,080 $ 112,340 The cost of the new equipment is $135,000. It has a six year useful life with an estimated disposal value at that time of $30,000. The sales representative selling the new equipment stated, "The new equipment will allow direct labor and variable overhead combined to be reduced by a total of $2.20 per unit." Finley thinks this estimate is accurate, but also knows that a higher quality of direct material will be necessary with the new equipment, costing $0.23 more per unit. Fixed overhead costs will decrease by $3,600. Finley expects production to be 8,800 ships in each of the next six years. Assume a discount rate of 5%. REQUIRED 1. What is the difference in net present values if Nautical Creations buys the new equipment instead of keeping their current equipment? Submit Answer Tries 0/8

Answer 1

24 25 20 21 20 20 SU Sunday cost of Casulation of NPV of current Equipment: ah manufacturing lost = $ 1,12, 340.17 p. u. DM - (31980/8200) 3.9 Dhe 29, 110/600) 8.55 Var 0/4..fo.wikia./ (15, 170/8200 1.85 9.3 X 8, 200 10 Monday Total Vic 76,460 + Fixed aft! 36,080 ver Total Lost & 1,12,340 Total cost of production tt. for 6,500 ships = 8,810x 9.3+36080 $ 117,920 lunulative discounted rate @ 5% Z. ASAT 5.075f. for 64

Total discountd cost for 6 years & towarst = $ 117,920 x 5.0758 - $5, 98,526.54 Calculation of NPV of tost nit f aut flows for new equipment Yr 0 $1,35,00 (coat of eart] Yoo ($ 40, no ] (Inflr of sale of old equa] Yr6 ($30, no] (Inflw at 6th gor mequet] Manufacturing Cost per annum Wednesday 10 De Voc as per previons 9. 3. egint p.u. a ped Red in direct lebaut E1/H (2.2) st mля у силна фьо. 23 7.33 X No f I crits de 8,800 $ 64,504 Add: tiaed lost van 34 668 32,480 (36,08073,60) 04, 184 96,984 PARA

The discouted cashflons, D (1, 35, 6-40,60] 1 2 95, aw 96,984 104 184 x 5.0757 4 ,92,262 2 3) – 30, w0 0.7462 = (22,386) Total discounted out fline 5,64,876 the differeme in NPVS = 33,65) ossiat It is recommended to purchan turday 14 new equipment